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February 29, 2012

Have We Turned the Confidence Corner? Millionaires Think So

A number of recent reports seem to suggest that various segments of the corporate and consumer markets—perhaps even Ben Bernanke—are feeling more confident about the direction of the economy, a suggestion punctuated Wednesday by the release of Spectrem Group’s Millionaire Investor Confidence Index (SMICI), which rose to its highest level in nine months.

The SMICI, which measures monthly the confidence level of financial decision-makers in households that have $500,000 or more in investable assets, rose 6 points in February to a positive 4, which Spectrem said was its highest level since May 2011. Spectrem has been conducting research on attitudes and trends among the high-net-worth consumer for 20 years; it began publishing its Millionaire Investor Confidence Index in 2004.

George Walper (left), president of Spectrem, said in an interview Tuesday that the most important finding in the February index is that millionaires “are feeling more confident for many months in a row” and that the index is on a “nice, steady upward tick” which “gives you a pretty good sense that people are feeling better.” Millionaires, he said, tend to be more sophisticated in their view of the state of the economy, and in Spectrem’s research, the level of U.S. unemployment has been their primary issue since the 2008-2009 markets and economic crisis, so millionaires’ confidence level has risen as the jobless rate has declined.

Placing one-month’s findings into context, however, Walper points out that the confidence level of millionaires has only returned to where it was in May 2011: “It’s been V-shaped since then to now,” he said, indicating “lots of positive trending.” When asked in the February survey “What factors affect your investment portfolio?” the major concerns of millionaire respondents were international issues, the political environment, the deficit and unemployment, trailed by oil and gas prices (see chart below).

But Walper warns that the recent sharp rise in gasoline prices will affect the confidence levels of both consumers in general, such as in the Consumer Confidence Index, and of the more affluent. “Gas prices will start affecting everyday Americans pretty quickly…that’s what Main Street America relates to, which drives consumer confidence and our overall affluent index,” he argued.

In a statement accompanying the release of the CCI, Lynn Franco, director of The Conference Board Consumer Research Center, noted that the Index is now close to the 72.0 level found in February 2011. She said that consumers “are considerably less pessimistic about current business and labor market conditions than they were in January. And, despite further increases in gas prices, they are more optimistic about the short-term outlook for the economy, job prospects, and their financial situation.”

Another closely watched barometer of the economy, the Chicago Purchasing Managers Index, also improved in February. The Chicago PMI, published by the Institute for Supply Management, stood at 64.0% in February compared to 60.2 in January, its highest level since last April. New orders hit an 11-month high, according to MarketWatch, order backlogs moved out of contraction and employment had the biggest one-month gain since March 2008.

Even Ben Bernanke (left) seems to be feeling a bit more sanguine about the economy. In his semi-annual testimony on Wednesday before the House Financial Services Committee, the Federal Reserve Board chairman first said that “the recovery of the U.S. economy continues, but the pace of expansion has been uneven and modest by historical standards.” He went on to say that he has seen “some positive developments in the labor market,” that “new claims for unemployment insurance benefits have also moderated,” and that the decline in the unemployment rate over the past year “has been somewhat more rapid than might have been expected.”

He also noted that “household spending advanced moderately in the second half of last year,” while warning that “the fundamentals that support spending continue to be weak,” and said positive things about housing affordability and manufacturing production growth. “Consumer sentiment,” he warned, “which dropped sharply last summer, has since rebounded but remains relatively low.” Ian Shepherdson of High Frequency Economics commented that on the jobs issue, “Bernanke admits the Fed is perplexed about the speed of the drop in unemployment and he made the point that a rise in their estimate of the sustainable unemployment rate might require a policy response. In short, this sounds like the start of the beginning of a process.”

Politics and Confidence

So returning to the issue of consumer confidence raised by Bernanke, politics is a major issue in this primary season. Is the confidence level of wealthier Americans affected by politics, such as in the runup to this year’s Presidential election? Wolper says that up until the last 18 months or so, historically the only time that national elections have affected Spectrem’s index has been in the period from Labor Day until the election. That has changed, he says, with the political environment remaining a concern among the high net worth.

“It didn’t fall off like it usually does after a national election,” Walper pointed out. He recalled that in 2004, Spectrem’s research showed that “the election concern was over the process,” referring to the contested Presidential election of 2000 which needed to be settled by the Supreme Court. However, the political environment, which he surmised was at least as much about political deadlock in Washington as it was about Presidential politics, “remained the number two concern of respondents over the last 18 months. I don’t know if we’ll see that ratchet up” as the election nears.

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